Payday-loan bans: evidence of indirect effects on supply


In November 2008, Ohio enacted the Short-Term Loan Law which imposed a 28% APR on payday loans, effectively banning the industry. Using licensing records from 2006 to 2010, I examine if there are changes in the supply side of the pawnbroker, precious-metals, small-loan, and second-mortgage lending industries during periods when the ban is effective. Seemingly unrelated regression results show the ban increases the average county-level operating small-loan, second-mortgage, and pawnbroker licensees per million by 156, 43, and 97%, respectively.

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  1. 1.

    Zinman (2010), Bhutta et al. (2015), and Bhutta et al. (2016).

  2. 2.

    Avery and Samolyk (2011) and Bhutta et al. (2016).

  3. 3.

    Dolmetsch (2008) and Duke (2009)

  4. 4.

    The following formula is used to determine APR as used by DeYoung and Phillips (2009).

    \( \textit{APR} = \frac{Fee * \frac{365}{Term}}{Loan Amount}\)

  5. 5.

    Borrowers can select into having payday loans reported on his or her credit report. This practice is not mandatory and is typically utilized by borrowers seeking to improve his or her credit rating.

  6. 6.

    The number of operating payday lending branches more than doubled between 2001 and 2004. By 2010, the industry remained highly concentrated with an estimated count of over 20,000 operating branches nationally (Flannery et al. 2005). Loan volume from physical store locations is estimated to have peaked in 2007, with $45 billion in loans (Burtzlaff and Groce 2011).

  7. 7.

    Versus less than 10% for the general population.

  8. 8.

    Existing industry studies examine the cost structure and profitability of payday lending firms. Flannery et al. (2005), Huckstep (2007), Skiba and Tobacman (2009), and Prager (2009) all confirm that “excessive” fees do not translate into excessive profits for the industry and that, essentially, the costs do in fact justify the price. Additionally, Prager (2009) examines other alternative financial services in addition to payday lending companies.

  9. 9.

    A $200 loan extended under the new guidelines, lenders could collect fees only in the amount of $2.15 (Parker and Clark 2013).

  10. 10.

    See “Appendix A” for the structure of regulations for each industry and identified avenues for payday-like loans.

  11. 11.

    See “Appendix A” for a more detailed discussion of these regulations.

  12. 12.

    See Ohio Neighborhood Fin., Inc. v. Scott, 2012-Ohio-5566

  13. 13.

    As stated by ORC 1321.20, licensing fees for pawnbrokers, precious-metals dealers and small-loan lenders cannot exceed $300. Second-mortgage lender fees cannot exceed $150.

  14. 14.

    Licensees have to complete both state and national-level training to receive certification.

  15. 15.

    November 2008 represents the last period before the law became legally effective. Results are robust for June and September of 2008; contact author for robustness results.

  16. 16.

    Demographic data are collected from the US Census American Community Survey 3-year estimates. See Prager (2009) for discussion on location choice of AFS providers.

  17. 17.

    See “Appendix A.”

  18. 18.

    Gold prices are measured using the observed market price per Troy Ounce from the London Bullion Market Association, adjusted for inflation, using 2006 as the base year.

  19. 19.

    As cited by Ohio Neighborhood Finance, Inc. v. Scott. Decided March 2011 by the Magistrate of Elyria County.

  20. 20.

    This is confirmed by a search of the Brown County Municipal Court records and the county-level court records of the observed counties in the state of Ohio.

  21. 21.

    Prager (2009).

  22. 22.

    January 2000 represents the period for comparison.

  23. 23.

    Relative to 2006 prices.

  24. 24.

    This study does not identify which firms are selecting into each markets or where the expansion itself is coming from. These questions are addressed in a subsequent study.

  25. 25.

    Marginal effects were estimated at the average price of gold, 0.688 thousand dollars per ounce.

  26. 26.

    Starting in 1981, second-mortgage lenders were permitted to make unsecured loans (Parker and Clark 2013).


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Thanks to the referees for their comments and recommendations. The author would like to thank Mo Xiao, Gautam Gowrisankaran Ronald Oaxaca, and Price Fishback for guidance, support, and valuable comments and suggestions. Thanks also to Miguel Ramirez, Eric Stuen, Daniel Hickman, and D’Wayne Hodgin for additional valuable comments and suggestions. Research results and conclusions expressed are those of the author.

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Correspondence to Stefanie R. Ramirez.

Appendix A: Alternative industries: regulations and policy

Appendix A: Alternative industries: regulations and policy


Pawnbrokers are regulated under the Ohio Revised Code (ORC), Chapter 4272, as financial service providers. Pawnbrokers extend loans to individuals in exchange for possession of an item of value for an agreed upon duration of time. At the expiration of the contract, an individual must repay the loan and any charged fees in order to regain possession of the exchanged item. If the loan (plus fees) is not repaid, the exchanged item is made available for sale by the pawnbroker. Both financial services offer small, short-term loans with very few conditions. Also, unlike payday loans, pawnshop loans do not require proof of employment or a checking account, thus making the pawnshop transaction somewhat easier for the borrower relative to the transaction requirements of a payday loan.

Precious-metals dealers

Precious-metals dealers are licensed occupations rather than financial service providers. By definition, precious-metals dealers purchase items made of gold, silver, platinum, other precious metals, or jewelry from the public. Precious-metals dealers explicitly purchase items with no expectation to be repaid or need to surrender the exchanged good.

Small-loan companies

Small-loan lenders are regulated by the ORC Chapter 1321 defining small-loan operators, sections 1321.01 to 1321.19. Small loans are defined as loans of $5000 or less and can be secured by personal property, but are not required to be. Unlike payday or short-term loans, there are no duration limits defined by the regulation. Allowable interest charges are based upon the amount loaned and cannot exceed 28% interest per year for loans less than $1000, 22% interest per year for loans over $1000, or 25% APR in total. The calculated APR includes all fee charges as a condition of the loan. However, and very important, the fees used to calculate the APR do not include loan origination fees, charges for default, deferment, insurance charges, court costs, credit line charges, credit report charges, and/or any other charges authorized by the lender (Parker and Clark 2013).

Second-mortgage lenders

Second-mortgage lenders are regulated under the ORC Chapter 1321, Sections 51 through 60. Lenders operating as second-mortgage lenders, as regulated, may extend “unsecured loans, loans secured by a mortgage on a borrower’s real estate which is a first lien or other than a first lien on the real estate, loans secured by other than real estate, and loans secured by any combination of mortgages and security interests.”Footnote 26 Within the statute, there are no stipulated loan or duration limits. Fee and charge limits are dependent upon whether or not the loan is secured, open-ended, and the size of the principle amount of the loan. For all loans extended under the second-mortgage lending law, interest charges are limited to 21% per year or 25% APR. However, just as with small loans, these calculated interest rates do not include loan origination fees, charges for default, deferment, insurance charges, court costs, credit line charges, credit report charges, and any other charges authorized by the lender. For unsecured loans in particular, lenders are allowed to charge additional origination charges that vary with the size of the principle amount, check collection charges, late charges, and insurance premiums, among other charges. These fees allow actual APRs to exceed the regulated maximum and approach 400% APR [depending upon the size of the loan and included fees) (Parker and Clark 2013)].

In 2008 within the Housing and Economic Recovery Act, the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) was passed establishing a national database for residential mortgage loan originators operating within the USA. States were required to establish licensing and registration requirements for mortgage loan originators in order to be in compliance with the SAFE Act. In October of 2009, Ohio enacted several regulations to this effect. Additionally, sections were added to the regulations pertaining to second-mortgage lenders specifying increased licensing requirements including written test and pre-licensing instruction requirements (Sections 1321.534 and 1321.533, respectively), and increased bond requirements (Section 1321.533). These changes increased the costs associated with applying for a second-mortgage lending licenses and increased the costs of circumvention. However, as written, the increased bond requirement only applies to funds that are associated with residential mortgages; therefore, if no residential mortgages are made, no bond is technically required.

The most important update made within the aforementioned sections is the addition of section 1321.521 pertaining to the applicability of the definition of “mortgage loan originator.” Section 1321.521 of the ORC states:

The superintendent of financial institutions may, by rule, expand the definition of mortgage loan originator in section 1321.51 of the Revised Code by adding individuals or may exempt additional individuals or persons from that definition, if the superintendent finds that the addition or exemption is consistent with the purposes fairly intended by the policy and provisions of sections 1321.51 to 1321.60 of the Revised Code and the “Secure and Fair Enforcement for Mortgage Licensing Act of 2008,” 122 Stat. 2810, 12 U.S.C. 5101.

As written, this section allows for certain lenders to be exempt from the increased requirements passed by state legislators, creating a loophole for lenders that do not originate mortgage loans or extend loans that are secured by residential mortgages.

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Ramirez, S.R. Payday-loan bans: evidence of indirect effects on supply. Empir Econ 56, 1011–1037 (2019).

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  • Financial institutions
  • Alternative financial services
  • Payday lending
  • Regulation